Momentum gathers for central trade repository

Legislators and industry participants are pushing forward with plans to create a central trade repository to hold records of over-the-counter derivatives transactions as a means of increasing transparency and reducing counterparty risk.

On August 4, US senator Charles Schumer announced he was drafting legislation requiring the consolidated reporting of all OTC trades to a central trade repository, on the same day as the International Swaps and Derivatives Association announced the formation of a Financial Products Markup Language (FpML) working group to facilitate trade reporting. FpML was first launched for interest rate swaps in 1999 and is marketed by Isda as the common language for derivatives trading, but the association wants to achieve more universal usage of the standard in preparation for enforced regulatory trade reporting.

The US Treasury on May 13 and the European Commission on July 3 both called for a trade repository in their respective proposals for derivatives reform. In its letter to the Federal Reserve Bank of New York on June 2, the Operations Management Group (OMG), a consortium of 27 broker-dealers, buy-side firms and industry associations, committed to record all credit default swap (CDS) trades in a repository by July 17, interest rate derivatives trades by December 31 and equity derivatives trades by July 31, 2010.

Confirming that it had met the first deadline, the Depository Trust & Clearing Corporation (DTCC), which has operated the trade information warehouse for credit derivatives since November 2006, announced on August 3 that a small proportion of CDSs previously unreported due to their customised nature had now been reported to the warehouse.

But the reporting of interest rate and equity derivatives will be more challenging, as the repository infrastructure doesn't currently exist, and trade reporting in both asset classes is more complicated, due to the number of transactions and market participants.

Isda's FpML working group, which met formally for the first time on August 4 and will continue to meet on a weekly basis, aims to bring together industry participants to extend the FpML standard and render it suitable for regulatory reporting of transactions.

"FpML is very well suited to do this kind of reporting. The challenge for the working group is to work with the different parties, including the regulatory community, to define exactly what they want to see in the reports," said Karel Engelen, director and head of technology solutions at Isda. "Even if in the short term certain institutions are not able to provide exact FpML representation, the fact that the architecture is out there and you know which elements you need to report on is of great value."

Charles Schumer's draft legislation would potentially take the repository idea a step further than the US Treasury's original plan, which recommended repositories should hold the details of all trades not cleared by central counterparties (CCPs). But Schumer's statement this week proposed that a central trade repository should hold the details of all OTC derivatives trades, both cleared and uncleared.

"There are multiple clearing houses, and more are springing up in the wake of the [Obama] Administration's proposal. As a result, market-wide information regarding the various OTC derivatives markets would remain fragmented and incomplete, depriving regulators of crucial information required to monitor systemic risk," said the New York senator.

See also: OMG commits to new clearing and reporting targets
Counterparty maze
OTC trade repository plan faces hurdles
Geithner calls for law change to force OTC derivatives clearing